Global Value Chains and Exchange Rate Disconnect

This study examines the effect of global value chains (GVCs) on the association between gross exports and the exchange rate. To do so, we quantify the composition of the GVCs using output‐related measures for sixty‐one countries from 2007 to 2020. This approach is better than the existing measures in capturing all the linkages of GVCs. Second, we analyse the importance of GVCs on the link between gross exports and the exchange rate using an econometric technique – the generalised method of moments. Our results show that GVC participation disconnects the exchange rate elasticity of exports. The empirical findings are robust and consistent across the sectors and income groups. Therefore, it is vital for policy‐makers to consider the implications of GVCs while devising any policy related to exports.